Steele Insulators is analyzing a new type of insulation for interior walls. The initial fixed asset requirement is $1.62 million, which would be depreciated straight-line to zero over the 7-year life of the project. Projected fixed costs are $287,400 and the anticipated operating cash flow is $136,300. What is the degree of operating leverage for this project?
A) 3.66
B) 1.92
C) 3.11
D) 2.27
E) 2.49

Question

Quizplus · Accepted Answer

To calculate the degree of operating leverage, we need to use the following formula:

DOL = (Operating Cash Flow / (Operating Cash Flow - Fixed Costs))

DOL = (136,300 / (136,300 - 287,400))

DOL = 3.11

Therefore, the degree of operating leverage for the project is 3.11.

Steele Insulators Is Analyzing a New Type of Insulation for Interior